How Does the Stock Market Work?

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Let's do this by example. Let's say you are the owner of a company that is worth $10 million. You want to share the risk (and rewards) of doing business so you decide to 'go public'. You then decide to divide your business net worth ($1m) into 1 million pieces (shares). You then decide to sell 900,000 shares to the general public on the stock exchange. Simple math places the initial offering price of your shares at $10 each. You then have an 'Initial Public Offering' (IPO) where you sell the 900,000 shares with a starting price of $10. Your business is now $9 million richer in cash but you are no longer the boss but working for the share holders. Generally cash generated by IPO's are used to expand the business, cancel debt, etc. As time progress your business makes money and/or loses money. If you make a profit your business decides how much of that profit is retained to invest in the business and the remainder is divided up among the share holds. Let's say in the first quarter after your IPO, your company made $100,000 in profit that will be given to teh shareholders in the form of a dividend. Since there are 1million shares outstanding each share holder will get $.10 times the number of shares they have. You will receive $10,000 because you kept 100,000 shares. The value of a business can be determined by multiplying the number of outstanding shares (1m) times the current share market price. If the business made money and purchased assets and such, then the value of the indiviual shares will grow. If the company loses money the value of the shares fall. The buyers and sellers of the shares of your business are watching the value of your business to determine when to buy and when to sell which is all based on how they think your business will perform in the future. Buy a low priced share of a business that makes good money and the share value goes up, divindens are paid and you sell your stock at nice profit. Buy a high priced stare and the business falters and share values drop and no dividends are paid and you lose money.

There ya go... as short and simple and I can make it. Hope this answers the question.

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